As poverty rates have fallen in Asia and elsewhere, Africa accounts for two thirds of the world’s extreme poor although it is home to only 16% of the world’s population. That industrialization is yet to happen in Africa is a major part of the explanation. Though various models—from the 18th-century industrializers to the broad convergence achieved by today’s successful late developers—industrialization has provided a proven pathway to economic transformation and increasing levels of income. It is not any different for Africa: the continent’s route out of poverty lies in achieving sustainable industrialization. 

While traditionally associated with manufacturing, contemporary industrialization, however, encompasses a broader concept founded on sustainable productivity growth driven by technological change and innovation. This is in consideration of the compounded interrelationship between the primary sectors—agriculture and natural resources—and services and manufacturing. Hence, the “return of industrial policy” is a nod to this complexity amplified by a changing geopolitical and geoeconomic global order, rapid technological advancements, and a climate emergency. A universal question, then, is not whether to pursue industrial policy, but how. 

Drawing upon a 2023 white paper published by the Firoz Laji Institute for Africa at the London School of Economics, The Art of Upgrading Industrial Policymaking Itself, which provides the framework for ongoing country case study research, we outline what the “how” means for African countries. To the extent that there is no single model or “golden policy template” leading to industrialization, what matters is the approach and process, including “experimenting and learning” to craft appropriate interventions by a committed developmental state. This first requires an understanding of the “big five” industrialization issues of today: policy consensus, green industrialization, supply chain security and resiliency, shifting industrialization paradigms, and widening policy space. But most importantly, it requires that industrial policy-making in Africa is itself upgraded to be more adaptive, collaborative, and consultative, while bringing together government, anchor investors, and development partners into a grand bargain for social and environmentally sustainable industrialization. 

The Big Five Issues of Industrial Policy-making 

First, for industrial policy to succeed, it needs to attract a sufficient level of buy-in or policy consensus. This concerns the political economy of industrial policy and how it is governed. It can entail building a collective strategic vision for industrialization, striking careful bargains with elites, and aligning economic incentives to ensure that the industrial policy—whatever it is—has a deep and sustained commitment to it at the highest levels of government, but also beyond the executive and through the business community to other constituencies and individuals within societies. Challenges to the current model of development in African countries are the distributional struggles and the emergence of stark inequalities. The mining and resource sectors have created islands of wealth, but few jobs. This has left increasing numbers of Africans to resort to the informal sector, and particularly informal and insecure services sector work. As Mazzucato and Rodrik (2023) have noted, welfare orientation is a critical aspect of achieving policy consensus. 

Second, with global temperatures already exceeding the Paris Agreement 1.5°C target in 2024, neither a degrowth strategy nor a “grow now and clean later” approach is a viable option for late industrializers. The path is clear, and it is green industrialization. However, as Lebdioui (2024) argues in Survival of the Greenest, what remains less clear is how to balance economic prosperity with the decarbonization agenda. Africa’s historic contributions to CO2 emissions are negligible, but are likely to rise as the continent develops. The challenge is to ensure the emergence of a competitive industrial sector while transitioning to cleaner energy and production methods. This should involve developing Africa’s underutilized renewable energy sources, reducing process emissions in production, and increasing resource efficiency. Green industrialization may also create opportunities as the world transitions to new technologies and patterns of consumption. For Africa, this could include leapfrogging into new and cleaner technologies, encouraging “green mineral” value chains, harnessing green hydrogen, and developing the continent’s sizable but underutilized renewable energy resources. Achieving these goals requires delicate balancing without compromising the just development aspirations of African countries. 

Third, the security and resilience of global value chains in the contemporary global landscape are under threat of geoeconomic fragmentation and costly trade diversion. In today’s uncertain geopolitical climate, where “friends” and “enemies” are equally considered targets of protectionism, the risks associated with global supply chains are being recalculated. Instead of getting trampled under foreign giants, African countries must consider how national industrial policies can traverse and circumvent such risks. 

Fourth, shifting industrialization paradigms must be taken into account by African countries. The three biggest emerging changes to the current industrial paradigm are the rise of digital production methods, the growth of platform production models, and continuing changes to the geographic distribution of production. 

Digitalization is increasing the skills and technology intensity of manufacturing, undermining its traditional developmental role in absorbing large numbers of workers from the countryside. Digitalization also creates opportunities that could be seized, including new possibilities for late industrializers like African countries to leapfrog into new ways of producing, including the increased role of digital services in manufacturing, many of which can be outsourced. 

The two other factors that define industrial paradigms include the organizational model of production, currently characterized by network production and platform production, and the geographic scope of industrialization, currently dominated by value chains at regional as well as global levels. These developments come with opportunities and challenges that African countries must factor into the design and implementation of industrial policy. For instance, regional or global value chain systems entail specializing in specific tasks but require efficient transport, information and communication technology, and energy infrastructure as the price of entry. 

Finally, the “return of industrial policy” brought with it widened policy space. The expansion of the acceptability of industrial policy measures is an opportunity for African countries as late industrializers. While this opens the door to more adventurous industrial policies, it calls for a rethinking of the multilateral rules-based system to respond to this changed reality. 

Tenets of Sustainable Industrial Policy 

Industrial policy can be a powerful tool for Africa’s development, but without the certainty of any specific model to follow, it requires the art of upgrading industrial policy-making itself to be more nimble in a changing world. The following five tenets outline the foundations of a more sustainable, active, and intentional industrial policy-making process. 

The first tenet, adaptive industrial policy-making, positions experimentation and learning at the centre of economic transformation. It appreciates that industrialization must occur in a new, unsettled era of challenges and opportunities, including “greening” industrialization, the reprioritization of supply chain security, and shifting industrialization paradigms. Rather than “perfecting” industrial policy design, an adaptive approach prioritizes systematic implementation through dedicated “policy-testing” zones or “sandboxes,” such as Special Economic Zones (SEZs) and pilot industrial parks. However, the process does not stop here. A complementary policy learning ecosystem allows for a rigorous assessment of outcomes and policy refinement. Doing so allows governments to build capacity by delivering results and to focus more on implementation (which is generally appreciated to be a greater challenge in many African countries) instead of getting caught up in perfecting policy design. 

Secondly, upgrading the practice of industrial policy-making requires a consultative approach for developing iterative dialogue channels to leverage synergies between stakeholders in the public, private, and third sectors, both local and international. What Peter Evans (1995) calls embedded autonomy is the outcome of an approach that preserves the ability of a state to protect its autonomy from capture by competing interests. The key is to leverage stakeholder relationships to understand how industrial paradigms are shifting and where opportunities can be created. 

The third tenet, partnering for industrial policy-making, builds network capital that enhances the credibility of the industrialization agenda and garners a crowd-in effect of investment opportunities. However, gathering investments is not enough; the destination of the investment matters. For instance, most investment flows in Africa are concentrated in primary extractive activities, such as mining and energy. While partners can help shift this dynamic toward a mutually beneficial relationship, the onus is on African policy-makers to negotiate and realign partners’ interests toward supporting their own sustainable industrialization agenda. 

Partnerships between international and domestic agents are not limited to investments, but are central to a transboundary industrial policy-making approach, the fourth tenet. We live in an interconnected world where the consequences of an event in one part of the world—geopolitical rivalries, supply chain disruptions, ecological catastrophes, and viruses—are felt in another. Some of the opportunities for African industrialization are also transboundary, including the potential to create scale economies and tap into rapid market growth through African regional integration. But the influence of individual African countries and their technical capacities in transboundary issues can be limited. 

To use the language of the African Union’s Agenda 2063, African countries must “speak with one voice and act collectively to promote our common interests and positions in the international arena.” By pooling their resources and influence, African countries can better ensure that their interests are heard and accounted for in global issues. The African Continental Free Trade Area can be a powerful resource not just for integrating African economies, but for establishing commonalities on tricky issues being negotiated in multilateral fora. 

What all four tenets have in common is the demand for building greater capacity to shape industrial policy-making that is adaptive, consultative, partner-based, and transboundary. The final tenet, capacitated industrial policy-making, forms the foundation of upgrading the practice of industrial policy-making. It refers to the need for effective and well-resourced public institutions for policy development and implementation. Such capacity provides governments with agency to steer the national industrialization agenda, building upon local expertise and knowledge. Well-capacitated institutions facilitate the effective brokering of different interests not only to ensure implementation remains on track, but also to navigate regional and international partnerships to achieve mutually beneficial transboundary goals. 

Conclusion 

The framework we have outlined provides a basis for putting industrial policy-making practice on a sustainable, adaptive, and experiment-based trajectory. We recognize that the framework assumes a rigorous and deliberate decision-making process across the design, implementation, and monitoring of industrial policies. In practice, however, policy-making is often reactive, rather than adaptive. Nonetheless, navigating today’s complexity to achieve sustainable economic transformation and overcome pervasive poverty requires more than tinkering with industrial policy instruments. Instead, the key to unlocking the gains of industrial policy lies in upgrading the practice of industrial policy-making itself. While no “golden template” exists, our framework serves as a starting point for a universal approach for rethinking the design, implementation, and monitoring of industrial strategies. With capacitated industrial policy-making as a foundation, the process must be adaptive, consultative, and transboundary to address the challenges of a sustainable future. 

David Luke, Professor in Practice and Strategic Director and Hana AlWakeel, Research Assistant, Firoz Lalji Institute for Africa, London School of Economics and Political Science.

Industrial Policy’s Latest Chapter 

Few areas of economic policy have made such a spectacular comeback as industrial policy. Long viewed with suspicion by much of the economics profession and by advocates of market liberalization, industrial policy today anchors national economic strategies in countries at all development levels. The search for resilience, technological upgrading, and security in production has pushed governments to re-engage with questions of market structure, policy coordination, and public sector intervention. In the process, the frontier between market and state, long tilted toward the former, has become increasingly blurred. 

Yet amid this revival, one fundamental question is receiving too little attention: What does industrial policy mean in an age dominated by services? 

Services today account for roughly two-thirds of global GDP, the bulk of employment, and an ever-growing share of cross-border trade and investment, including that delivered over digital highways. Services are the main drivers of innovation and productivity. Yet prevailing frameworks of industrial policy—its instruments, institutions, and very vocabulary—remain deeply rooted in the manufacturing paradigm of the past century. 

If industrial policy is about shaping the structure and trajectory of an economy, then services must occupy centre stage. The time has come, then, to think seriously about what an industrial policy for services might look like. 

From “Making Things” to “Making Things Work” 

Economists have traditionally divided economic activity into three pillars—agriculture, industry, and services—assigning industrial policy to the second. The term itself betrays its manufacturing origins. Services were often treated as residual, largely “non-tradable,” or simply as final consumption activities. 

Such a view is no longer tenable. Services today form the backbone of productive life. They are not only final outputs—finance, health, education, tourism—but essential inputs into all that economies produce, sell, trade, and invest in. Logistics, design, communication, finance, and professional services exert far-reaching impacts on the productivity of agriculture and manufacturing alike. 

Simply stated, there is no effective industrial policy without a services policy. Services are the connective tissue of modern production and competitiveness. 

The Return of Industrial Policy—and its blind spots 

The global revival of industrial policy is driven by profound structural shifts: geopolitical tensions and the technological rivalry underpinning them, climate imperatives, and pandemic-era disruptions. The pursuit of just-in-time efficiency through global supply chains has given way to an emphasis on just-in-case resilience and redundancy. 

Most of this new policy energy has focused on manufacturing—semiconductors, batteries, green technologies—reflecting an understandable if at times backward-looking nostalgia for the tangible. Yet, the sources of growth and innovation have moved decisively toward services. A 21st-century industrial policy that clings to 20th-century imagery risks missing where transformation is actually occurring. 

Why Services Sit Uneasily in Traditional Frameworks 

Institutional and conceptual legacies explain why services remain marginal in industrial policy debates. Every country has a Ministry of Industry; none has a Ministry of Services, a sector whose innate heterogeneity implies significant institutional dispersion. Instead, service sectors are regulated through fragmented silos—telecommunication authorities, central banks, education, transport or tourism ministries—each pursuing vertically narrow mandates. 

The traditional tools of industrial policy—tariffs, subsidies, local content rules—were designed for a world of production and trade in goods. The intangible nature of services, the ubiquitous nature of the market failures associated with their supply, and the fact that their delivery across borders implies the movement of factors of production—both capital and labour—all point to the need for a different policy toolkit consisting of regulatory reforms, digital and physical infrastructure, skills development, and open, competitive markets. 

Services as the Hidden Engine of Competitiveness 

Significant (if still imperfect) advances in data gathering are helping us understand just how central services have become. Value-added trade statistics show that intermediate services—those embodied in the production of other goods and services—account for roughly two-and-a-half times the value of trade in final services. 

This insight transforms how we need to think about competitiveness and the role services play in it. Efficient finance, logistics, and communication systems enhance productivity across the economy. The strength of a country’s manufacturing base depends fundamentally on the quality of its services backbone. 

What an Industrial Policy for Services Entails 

Designing policy for the services economy means focusing on the enabling conditions that allow services to flourish and to catalyze economy-wide growth. Five pillars stand out: 

1. Infrastructure: Reliable energy, broadband, transport, and payments systems are the essential plumbing of a service economy. Without them, productivity gains elsewhere stand to be impeded.
2. Investment and foreign direct investment: Most cross-border trade in services occurs through a commercial presence abroad (Mode 3 in trade parlance). Attracting, facilitating and retaining foreign direct investment brings not only capital but also know-how and global connections. Costa Rica and the Philippines demonstrate how strategic openness to foreign direct investment can foster competitive service hubs.
3. Skills and human capital: Services are people- and skill-intensive. India’s information technology (IT) success rests on decades of investment in engineering and technical education. Mauritius and Rwanda likewise illustrate how targeted skills policies can transform small economies into dynamic services exporters.
4. Regulatory quality: Pro-competitive regulation is the oxygen of service innovation. Clear, predictable, and transparent rules encourage entry and efficiency; restrictive licensing and opaque governance stifle them.
5. Connectivity—physical and digital: Efficient logistics and robust digital networks are preconditions for participation in global services value chains. Digital infrastructure today plays the role that roads and ports once played for manufacturing. 

Countries that have aligned these elements—Chile, Egypt, the Philippines, Costa Rica, Uruguay, the UAE, Mauritius, and Rwanda—show that small and medium-sized economies can build competitive advantage in services through deliberate policy effort. 

Digital Industrialization: The new frontier 

The digital revolution has opened a new frontier for services-led development. Digital industrialization—using digital tools to boost productivity, inclusion, and export capacity—is reshaping policy agendas across the globe. 

India’s experience is instructive. Sustained public investments in digital identity, payments systems, and e-governance created a foundation for a vibrant fintech and IT ecosystem. Across Africa, “digital moonshot” initiatives seek to replicate this by combining connectivity, competition, and digital skills. 

Yet, many countries that champion domestic digitalization remain cautious about binding international rules on e-commerce and data flows. Balancing openness with the preservation of domestic policy space is one of the central tensions of digital industrialization. 

The Strategic Case for Services-Led Growth 

For developing economies, a services-centred industrial strategy offers several structural advantages: 

• lower capital intensity: Services typically require less upfront investment than manufacturing.
• smaller minimum scale: Global competitiveness can be achieved through niche specialization.
• employment potential: Many services remain labour-intensive, offering opportunities for inclusive job creation even as automation spreads in industry.
• environmental sustainability: Services generally have a smaller carbon footprint, aligning with green growth goals. 

For many countries, the service economy thus represents a more inclusive and feasible path to structural transformation than traditional manufacturing-led models. 

Policy Space and the Scope for Experimentation 

An often-overlooked fact in policy debates over industrial policy is that governments enjoy considerably greater freedom to pursue industrial policy in services than in manufacturing. The General Agreement on Tariffs and Trade imposes tight disciplines on tariffs and subsidies, whereas the General Agreement on Trade in Services (GATS) remains comparatively flexible. 

Tariffs are all but irrelevant to services trade; subsidies are only loosely disciplined under the GATS, and most investment incentives lie outside its scope. Even domestic regulation is subject to relatively soft disciplines, as reflected in the predominantly hortatory language of recently adopted World Trade Organization rules on domestic regulation of services. This asymmetry creates valuable policy space for innovation and experimentation. 

A number of preferential trade agreements, both bilateral and regional, have gone further in their disciplinary scope—particularly on digital trade, investment protection, performance requirements, and data governance—but there can be little doubt that the multilateral regime still offers ample room for tailored national approaches. 

Lessons for Policy 

A few broad lessons emerge from recent experience: 

• expand the concept of industrial policy. Structural transformation today depends as much on services as on manufacturing.
• integrate services across policy silos. Competitiveness in any sector relies on high-performing service inputs.
• harness digital transformation. Digital services are both enablers and growing sources of export expansion.
• invest in skills and regulatory institutions. Human capital and sound regulation are the new industrial infrastructure.
• use policy space strategically. Flexibility under the World Trade Organization’s General Agreement on Trade in Services and preferential trade agreements provides scope for policy experimentation, but greater developing country engagement in shaping new global norms remains essential. 

Bringing Services to the Core 

For decades, industrial policy conjured images of factories and assembly lines. Today, the sources of dynamism lie elsewhere—in software labs, logistics hubs, hospitals, and classrooms. 

An industrial policy for services is not a contradiction; it is a recognition that making things work can be as crucial as making things. Services are the infrastructure of competitiveness, the carrier of innovation, and the foundation of inclusive growth. 

As the global economy becomes ever more knowledge-intensive and digitally interconnected, bringing services from the margins to the core of industrial policy thinking is not merely desirable—it is indispensable. 

Pierre Sauvé is a Senior Research Fellow and Adjunct Lecturer at the University of Bern’s World Trade Institute ([email protected]).

Nepal’s textiles and clothing sector sits at a pivotal moment. Its experience is interesting not only for what it reveals about the country’s own development trajectory, but also for what it illustrates about industrial policy in least developed countries (LDCs). Despite long-standing structural constraints and only limited, inconsistent policy support, garments and carpets have managed to remain core export earners through craftsmanship, niche branding, and preferential market access. As Nepal approaches LDC graduation, this article uses the sector’s experience to explore how industries survive and adapt, and what policy interventions—short of subsidies—could be used to support competitiveness in the years ahead. 

Exports have not been the Nepali economy’s strong suit, especially over the last 25 years. As a percentage of GDP, exports of goods and services fell from 26.3% in 1997 to 6.8% in 2022, lower than the average for LDCs, low-income countries, and lower-middle-income countries. The performance of merchandise exports has been especially dismal, falling from 13.1% of GDP in 1999 to 2.9% in 2022. 

After trailing goods exports for 13 years, services exports exceeded merchandise exports in 2013 and maintained the lead until 2020, when the COVID-19 pandemic dealt a severe blow to tourism. Yet service export receipts have not been sufficient to offset the decline in goods exports relative to GDP. Workers’ remittances, at 22.7% of GDP in 2022, have emerged as the biggest source of foreign exchange, dwarfing the combined earnings from exports of goods and services, foreign direct investment, and foreign aid. 

Manufacturing value added as a percentage of GDP has been in decline since the late 1990s; its highest recorded share was 9%. Although a decline in manufacturing’s share of output and employment is a general global phenomenon, and the peak share has been recorded at progressively lower levels of per capita income over time, the value added in manufacturing as a share of GDP in Nepal peaked at an income level much lower than the world average for such peaking, and the peak itself is significantly lower than the world average. Crippling power cuts and a raging armed insurgency took a severe toll on the manufacturing sector. Even after both challenges subsided, manufacturing has yet to register a robust recovery. Large-scale labour outmigration and the real appreciation of the Nepali rupee, fuelled in part by remittance inflows, have not helped competitiveness either—and have become a permanent feature of the economy. 

Textiles and clothing have long served as a launchpad for industrialization across the world, including in what are now developed countries. Despite the general challenges as well as more specific challenges (discussed below), textiles and clothing continue to be a major source of Nepal’s merchandise exports (31.5% in 2022). Two well-established subsectors in this broad category are readymade garments and hand-knotted woollen carpets. 

Constraints to Competitiveness 

A review of literature suggests that the following factors impede Nepal’s competitiveness in the garment sector: weak physical infrastructure, transportation systems that lengthen lead times, human resource issues, limited capacity for technology upgrading, and poor access to finance. Consultations with garment exporters confirm these findings. 

Producers increasingly identify labour-related challenges as their most pressing concern. A shortage of skilled and semi-skilled labour forces firms to operate below their potential—this results in firms often declining orders that they cannot fulfill on time. In addition, high labour turnover and skill mismatches reduce productivity. 

High logistics costs represent another crucial constraint. Reliance on air freight to meet delivery schedules, combined with the high cost of such transport, significantly drives up exporters’ costs. For landlocked Nepal, the lack of direct access to western Indian ports adds to the time and cost of shipping goods to the western hemisphere, including but not limited to textiles and clothing. This further erodes Nepal’s competitiveness in time-sensitive global value chains. 

Nepali garment exporters estimate their unit cost to be at least 25% higher than that of Bangladeshi competitors and identify low worker productivity as a key factor behind it. Nepali hand-knotted woollen carpet exporters similarly report that their products are at least 25% more expensive than those from India, based on the authors’ interactions with exporters during a survey conducted for a forthcoming SAWTEE study on the carpet industry. 

The high cost of living in Kathmandu valley, home to the capital city, where most of the production units are located, and limited margins to increase wages, according to carpet exporters, have led to a shortage of workers. The younger generation of workers is increasingly choosing to migrate abroad rather than working on the loom for 12 hours a day, 6 days a week, to make only enough to meet their subsistence needs. Hence, enterprises are not able to expand production quickly, even in the face of increased orders. 

Drivers of Competitiveness 

And yet, despite the constraints, Nepali garment and carpet exporters are surviving, if not thriving. What’s behind this? 

Unique craftsmanship and predominantly hand-made production allow Nepal to differentiate its garments from mass-produced items in countries such as China or Vietnam. Enhanced market access stemming from Nepal’s LDC status, particularly duty-free access in the European market and under other Generalized System of Preferences (GSP) schemes, is another crucial source of competitiveness. Additionally, exporters believe Nepal’s positive image has created a market segment that ensures a steady demand for Nepali products. Although Nepali garment exports are a shadow of their former self—with their nominal value still below the peak reached some quarter of a century ago (USD 85.8 million in 2022 versus USD 222 million in 2003)—these factors have contributed to the survival of the industry. It no longer specializes in churning out mass-produced items on a cut-trim-make model, as it did during its heyday from the mid-1980s to the phase-out of global quotas by 2005. Post quota phase-out, what remains of the industry is more rooted in more durable sources of competitiveness. 

Nepali carpet has managed to withstand competition from more efficient competitors and commands a 12% share of world exports of hand-knotted woollen carpets. This can partly be traced to Nepali carpet-producing units being smaller and hence able to take custom orders from buyers. This has also resulted in these carpets being able to fetch premium prices. Moreover, the brand value attached to Nepali hand-knotted carpets is a major selling point. Flexibility, strong customization capacity, and consistently high quality have helped create goodwill among buyers and a brand recognition of Nepali carpets, enabling them to take on cheaper and more efficient competitors like India and create a niche for themselves. Nepal’s carpet sector has pulled itself from the rubble of the 1990s, when it was hit by a storm of bad publicity in European markets concerning the use of child labour. In 1994, Nepal exported carpets worth USD 159 million, and even in the next three decades, it was unable to regain that annual value, with export earnings from carpets in 2022 standing at USD 84 million. 

LDC Graduation 

As Nepal prepares to graduate from LDC status, concerns about the potential loss of preferences are growing. These concerns are particularly pronounced in the garment sector, which is estimated to be the hardest hit by tariff increases following the graduation. A SAWTEE study shows that clothing exports would see a 6.7% hike on average trade-weighted tariff (1.4% if Nepal qualifies for next-best schemes such as the EU’s GSP+), and a World Trade Organization study estimates that the clothing sector would see a drop in exports of 13.3% (of current exports) as a result of increased tariffs. 

Furthermore, more stringent rules of origin—for example, double transformation requirement (yarn to fabric to clothing) compared with the current single transformation (fabric to clothing)—are expected to cause further deterioration of export competitiveness. The yarn industry is a major source of exports. Nepal also has fabric manufacturers. While various iterations of Nepal’s industrial policy over several decades have emphasized the need to foster backward and forward linkages, this has not been backed by actions to address coordination failures that may be preventing yarn, fabric, and export-oriented apparel manufacturers from serving each other’s needs. 

However, a more realistic prediction of the impact of LDC graduation on the clothing sector has not yet emerged. For instance, producers are often not fully aware of what LDC graduation entails. This includes the potential changes in tariffs, whether they would be able to meet the new rules of origin, and the probable impact of these changes on their exports. In addition, recent changes in U.S. trade policy, specifically the imposition of reciprocal tariffs, make estimating the impact of LDC graduation more convoluted, as some exporters believe that they can significantly increase their exports to the United States, provided the existing tariff advantages for Nepal remain. 

Policy Support Rethink 

One of the government’s policies for promoting exports is the establishment of several special economic zones (SEZs), including garment processing zones. However, the two operational SEZs suffer from inadequate infrastructure and gaps in implementing legally mandated facilities. Moreover, they have not been able to attract garment industries, as the sector’s heavy reliance on air freight implies that firms cannot relocate to areas far from Kathmandu, and meeting labour needs in locations outside Kathmandu could be even more challenging. 

Garment and carpet exporters acknowledge that government export subsidies have been helpful, although delays and administrative hurdles reduce their effectiveness. However, the export subsidy program faces an uncertain future, given that the government appears to have an inadequate budget to fully fund it. The government recently indicated it was pausing the scheme pending a review: studies indicate its limited effectiveness in promoting exports, and it runs afoul of World Trade Organization rules (which may come under greater scrutiny after graduation). The imperative of crafting a subsidy policy that is efficient and effective, targeting market failures and generating positive spillovers, is sinking in. However, a recent government decision that implied export subsidies would be ended retroactively—that is, subsidy claims from firms that had exported in the previous fiscal year when the export subsidy scheme was still officially in place would not be processed—has further dented the already low level of trust of the private sector in the state. 

There is an urgent need to take a step back and ask a fundamental question as to whether money thrown at ad-valorem export subsidies to firms (or even production subsidies that policy-makers indicate will be central to a new subsidy regime) might be better spent on gathering and disseminating useful market intelligence, expanding participation in trade fairs, helping establish contacts between producers/exporters and foreign buyers, providing business development services, registering and promoting collective trademarks, and establishing sector development institutes. Many of these steps can be taken with state-industry collaboration, including co-financing. Moreover, incentives and support through fiscal and monetary policies for improving workers’ productivity and adopting and adapting improved technologies have not received meaningful policy attention. 

Industrial policy, of which trade policy can be considered a part, is not just about subsidies. It could be as simple (or perhaps complex) as ensuring inter-agency coordination, among and within ministries, which has been in short supply in Nepal. Policy incoherence and instability have been one result. Fostering linkages between, say, niche pashmina wear and the raising of chyangra (mountain goats) for wool to be spun into yarn requires a well-planned and coordinated teamwork by, inter alia, the Ministry of Industry, Commerce and Supplies, the Ministry of Agriculture and Livestock Development, the Ministry of Finance, and the divisions and departments therein. 

For years, the Board of Trade, which sits atop the institutional architecture for trade policy implementation and coordination, struggled to meet regularly, often falling short of the requirement to convene at least once every 2 months. Nepal can draw lessons from Ethiopia, also a landlocked LDC, where a national export coordination council committee, set up in 2003 and chaired by the prime minister, met every month, almost without fail, and not only adopted measures to ease export bottlenecks but, crucially, rigorously monitored implementation. On the council’s watch, Ethiopian merchandise exports grew by 22% per annum on average between 2006 and 2012. 

The rise of environmental measures with trade implications in important Western markets—for example, the carbon border adjustment mechanism and the digital product passport requirement in the European Union—introduces new challenges but also potential competitive openings for Nepali exporters able to comply early. It also increases the salience of inter-agency coordination. The current industrial-trade policy regime (which includes policies, strategies and institutional mechanisms) is not attuned to a rapidly changing international landscape and needs a rethink. 

This article draws on preliminary findings of an ongoing study at SAWTEE. Views are personal. 

Paras Kharel, Executive Director, Kshitiz Dahal, Senior Research Officer, and Dikshya Singh, Program Coordinator, South Asia Watch on Trade, Economics, and Environment (SAWTEE).

Industrial policy has returned to the global economic agenda with remarkable force. Much of the recent debate has focused on manufacturing, high-tech competition, supply-chain resilience, and the tools governments might deploy to fix—or disrupt—market outcomes. Yet the field that has lived with extensive government intervention the longest is often overlooked in these discussions: agriculture. 

Agriculture has dealt with questions of subsidies, market distortions, policy trade-offs, and social objectives for decades. It has also been considered a strategic sector, at the crossroads of international geopolitics and national sovereignty agendas. It therefore offers valuable lessons—and warnings—for today’s industrial and green industrial policy debates. Moreover, agriculture is not insulated from these new policy directions. Decisions made in industrial, energy, and climate arenas increasingly shape agricultural realities upstream and downstream, especially as the bioeconomy expands. 

In what follows, I highlight two sets of insights: what industrial policy can learn from agriculture’s long history of intervention, and how emerging green industrial strategies will, in turn, reshape agriculture. 

Agriculture: A sector long shaped by policies 

Agriculture is not a typical market. Around the world, it is—by design—highly distorted. Support levels of 25%–30% of production value are not unusual for certain commodities, far exceeding the levels now considered significant in manufacturing. Governments intervene because agriculture carries multiple outcomes, economic and non-economic alike, that markets alone cannot price. This has led to a specific treatment of agriculture in international trade talks, both at the global and bilateral levels. For instance, it took half a century after the signing of the General Agreement on Tariffs and Trade to bring disciplines to agricultural subsidies with the Uruguay Round Agreement, and the agricultural issue has remained a major hindrance in unlocking the Doha Round negotiations. 

More than 20 years ago, the European Union defended its agricultural policies by emphasizing agriculture’s multifunctionality—its contributions to jobs, food security, rural landscape preservation, culture, biodiversity, and tourism. On one hand, the social value of agriculture often exceeds its market value. On the other hand, food prices are already too high for too many people globally: 2.6 billion people worldwide are not able to afford healthy diets. 

Agricultural policy has followed a familiar sequence across countries over the past decades: 

• first, produce more food—especially staples. This was the mantra of the green revolution.
• then, stabilize and raise farm incomes, often when the realization of the first objective has led to overproduction and the fall of agricultural prices.
• then, integrate environmental concerns and limit externalities associated with agricultural production.
• and now, promote healthier diets and long-term sustainability while trying to address problems originating in distorted production patterns. 

These goals all address important human needs and cover different aspects of the sustainability agenda, including social, economic, and environmental outcomes. However, they often conflict, leading to trade-offs, and their weighting in policy decisions varies across periods and development contexts. Policies designed in the post-war era to boost output were never intended to minimize environmental impact, yet governments now retrofit them to justify environmental objectives or to fit them into World Trade Organization “green box” rules, which encompass policies considered less distortive and that address market failures. Unfortunately, these market failures are real, and costs are adding up, especially when tracking them from farm to fork: the global agrifood systems impose hidden costs equal to 10% of global GDP, as show by the Food and Agriculture Organization of the United Nations (FAO), through degraded ecosystems, soil loss, and health impacts linked to undernutrition and obesity. Policy-makers thus face a dual challenge: ensuring food security while ensuring agriculture does not impose unsustainable environmental and health costs. 

Rethinking Policies and the Repurposing Agenda 

The policy debate around agriculture today is dominated by the concept of repurposing—redirecting public spending to deliver more societal value, by aligning with new priorities, notably sustainability, while minimizing distortions and economic inefficiencies. 

But repurposing is difficult, and past policies have long-standing consequences. Removing past subsidies is not only a political economy nightmare: no part of society likes to see its benefits removed, but also an economic conundrum. Agriculture depends on land, a non-mobile, long-lived asset whose price capitalizes subsidies: higher agricultural subsidies mean higher land prices. Phasing them out would bankrupt farmers who contracted loans to buy land. This political and financial reality helps explain why countries continue to transfer large sums to agriculture—and why reforms are slow. It is difficult for farmers to become green in their practices while they are in the red on their financial statements. 

The repurposing agenda needs to address two distinct challenges that have two separate implications for policy design and taxpayers. 

• Moving from old agricultural practices, often incentivized through “bad” subsidies, to new ones has a transition cost, e.g., stopping fertilizer overuse to adopt regenerative practices that increase soil health in the long term is often associated with short-term yield losses. Keeping farmers profitable during the transition needs support: public payments can help bridge that gap. After the transition, support can gradually decline, and a new equilibrium that guarantees farm profitability will be reached.
• The long-term delivery of public goods, especially ecosystem services, requires continuous payments.
• Some practices—such as agroforestry, soil carbon restoration, or maintaining tree cover—yield high social value but low private returns. If society wants these outcomes, it must pay for them indefinitely. While new markets could be created and used to mediate transfer from one part of society to others with limited public sector intervention, in many cases, relying on governments and taxpayers' money is the most immediate solution. 

These ideas echo debates now emerging in industrial policy: what outcomes are we buying, for how long, and at what trade-offs? 

Food Security as a National Security Policy 

Controlling bread and breadbaskets has, for centuries, been a way to control people and nations. Today, food security is part of the national security agenda of many countries and interacts with the wider web of core securities: water, energy, and health. At the sectoral level, we see similarities between the “national security” argument used in industry and the “food security” or ‘’food sovereignty” argument used in agriculture. The logic is similar: countries want to guarantee a local supply of essential goods for their economy and their population, and avoid being dependent on foreign powers. Still, agriculture behaves differently, and the nascent industry justification does not. 

Unlike manufacturing, primary agricultural production has limited economies of scale. Learning by doing at scale remained limited, and countries can not simply create massive farms without encountering escalating environmental damage, biosecurity risks, and resource limits. The one area where scale matters is research and development (R&D), where large investments can transform crop varieties and yields. 

In most other cases, expanding domestic production to achieve some self-sufficiency target may create more problems—disease risk, environmental stress, water scarcity—than it solves. 

Policies Could Improve Efficiency, but the Notion of Productivity Needs to Be Reconsidered 

Agriculture also forces us to rethink productivity metrics. Traditional measures—yield per hectare—capture only land productivity, not overall efficiency. A smallholder farm with high yields may still deliver very low income per worker. Total factor productivity is a better notion, always favoured by economists, but it remains anchored in what is priced: marketed outputs, inputs and factors. As we have seen, agricultural production involves a lot of missing markets, leading to hidden costs and forgotten benefits. 

Working with the Organisation for Economic Co-operation and Development (OECD), FAO is developing measures of sustainable productivity, integrating carbon footprints, water use, biodiversity impacts, and other non-market externalities. A policy that appears inefficient in market terms may significantly improve collective welfare and societal productivity when environmental and health benefits are considered. 

The right productivity metrics will also serve as a guiding star for better policies and investments. For instance, in the long run, R&D expenditures have played a critical role in increasing production while limiting pressure on land. However, productivity metrics that will not reflect the benefits of water-saving technologies or nature-based solutions will encourage the continuation of old innovation models. 

This broader framing is essential as industrial policy increasingly pursues climate and sustainability goals. 

How Industrial and Green Industrial Policies Affect Agriculture 

Agriculture does not operate in isolation. Industrial and climate policies shape the cost and availability of inputs, the structure of markets, and the competitive environment for farmers. 

Upstream Linkages: Equipment, inputs, and energy 

Some countries support agriculture indirectly through industrial policy. Subsidies for tractor or fertilizer producers allow them to sell inputs below cost to farmers, without notifying these as agricultural subsidies under WTO rules. 

Energy policy also matters profoundly. Agriculture is energy-intensive, and high fuel or electricity prices raise production costs. Conversely, low-cost solar power can transform rural areas, enabling affordable irrigation in regions far from the grid. 

The green energy transition—hydrogen, green ammonia—could reduce input costs in the long term. But competition for these resources is intensifying since ammonia is a cornerstone of the fertilizer industry. Maritime transport, for example, is moving toward ammonia-based fuels. These sectors can pay higher prices than farmers, potentially crowding out agriculture unless policies anticipate the distributional impacts across and within countries. 

Downstream Linkages: Biofuels and the bioeconomy 

The global push to decarbonize will sharply increase demand for biomass—for biofuels, bioplastics, construction materials, and more. This demand can support farmers by increasing commodity prices or creating new markets. 

However, it can also create tensions: 

• food vs. fuel, as seen in past biofuel booms.
• land competition, especially in countries with limited arable land.
• policy conflicts, where ministries of trade, environment, and agriculture disagree over whether a policy aims to be “green” or to support domestic producers: sustainable feedstocks and locally sourced feedstocks are not synonymous. 

As the world shifts from fossil carbon to biogenic carbon, agriculture becomes a central supplier of industrial feedstocks. The implications—economic, environmental, and social—are enormous. 

Uneven Capacities and Fiscal Realities 

Today, half of all fiscal transfers to farmers occur in high-income countries, with another half in middle-income countries, but this ratio is changing quickly. Low-income countries, despite having the most farmers, provide almost no support simply because they lack fiscal space. 

This asymmetry matters. As industrial and green industrial policies reshape agriculture globally, richer countries will be better positioned to cushion farmers against adjustment costs, while poorer countries will face more acute pressures through market pressures and new regulations. 

Bringing Agriculture Back Into the Industrial Policy Debate 

Agriculture offers decades of experience—positive and negative—that can inform today’s industrial policy revival. It shows the difficulty of phasing out entrenched subsidies, the importance of accounting for externalities, the power of R&D, the political economy of land, and the need to align multiple societal objectives. 

At the same time, emerging industrial and green industrial policies are already transforming agriculture through energy transitions, bioeconomy expansion, input markets, and sustainability standards. 

We must therefore view industrial policy not only through the lens of manufacturing competitiveness, but also through its deep interconnections with agrifood systems, rural livelihoods, and global sustainability. Aligning agrifood system transformation with the evolution of other sectors requires a holistic strategy with clear goals and considering linkages: this is why the FAO has released a Global Roadmap to achieve food security and nutrition in the context of climate actions, compatible with the International Energy Agency roadmap toward net-zero. 

Agriculture is both a source of lessons and a sector profoundly affected by the industrial policies of the future. Ignoring this link would mean overlooking one of the most critical dimensions of economic transformation in the decades ahead, and a core sector in our daily life and the geopolitics of this world.

David Laborde is Director of the Agrifood Economics Division, FAO.

The New Industrial Frontier: From factories to platforms 

Industrial policy has re-emerged at the centre of global debates and as a central mechanism of economic development, but the terrain on which it operates has changed profoundly. Historically designed to nurture manufacturing capacity and manage trade, industrial policy now confronts a landscape in which value creation is increasingly intangible, organized through digital platforms and new networks of production and trade. 

To understand this transformation, it is worth recalling what industrial policy was originally meant to accomplish. Traditional state-led industrial models built productive capacity through targeted support, protection, and coordination, aligning state, industry, and finance toward common development goals. Tariffs and incentives shielded infant industries; state enterprises and public investment promoted industrial upgrading and innovation. These instruments persist, yet in the digital economy, competitiveness depends less on the physical production of goods than on the ability to coordinate through digital infrastructure. 

Digital platforms—infrastructures that match, mediate, and monetize interactions across users and markets—now function as the connective tissue of globalization: (re-)organizing power relations, exchange, and trust. They connect clients and workers, use algorithms to allocate tasks, and set the rules that govern how income and reputation are distributed. Their influence derives not from owning factories but from controlling data, determining who works, who learns, who profits, and who becomes visible in global markets. This reconfiguration shifts the frontier of industrial policy from sectoral promotion alone to the governance of infrastructure. Knowledge, innovation, and coordination—the fundamental assets of industrialization—are increasingly embedded within algorithmic systems and proprietary databases. 

In an economy organized through code and connectivity, the capacity to turn data into domestic innovation now plays the role that investment in factories once did; it underpins competitiveness and resilient industrial trajectories. Data governance, therefore, becomes not only a matter of privacy or security but a central pillar of industrial policy. Once treated as a mere by-product of production, data has become the primary input of value creation in the digital economy. To govern data is, increasingly, to shape the pathway of development itself. 

Kenya’s Digital Turn 

The digital transformation is redefining how low- and middle-income countries (LMICs) conceive and implement industrial policy. Kenya’s experience in building a digital services sector, anchored in business-process outsourcing (BPO), information-technology-enabled services (ITES), online freelancing, and digital entrepreneurship, illustrates both the promise and the paradox of industrializing through integration into digital and platform-mediated supply chains. 

Since the early 2000s, Kenya has positioned the digital transition as a core pillar of state-led transformation. The Digital Master Plan 2022–2032, the National ICT Policy Vision 2030 framework, and national programs, such as Ajira Digital and Jitume Labs, have aimed to connect youth to global online work and attract outsourcing investment. Within the East African Community’s 2022 tariff schedule, Kenya still differentiates between information and communication technology components and finished electronics to promote local assembly, showing the continuity of industrial tools. But its developmental horizon now extends beyond goods production to digital services, connectivity, and skills. By 2025, roughly 1.9 million Kenyans were engaged in digital work, including about 1.2 million platform-based gig workers. On the global Online Labour Index, Kenya accounts for about 1% of all online labour supply, ranking among Africa’s largest digital work exporters. These figures help sustain the narrative of Kenya as the “Silicon Savannah” and signal the country’s deepening integration into the global digital services market. 

Kenya’s integration into global BPO, ITES, and digital labour markets has created jobs and digital capabilities, but domestic value capture remains limited. Workers produce essential data for the global digital and AI economy, yet lack ownership or control over these outputs, and most locally generated data is stored and monetized abroad. Furthermore, most production is mediated by foreign-owned platforms whose data infrastructures and algorithms lie outside national oversight, producing what can be described as industrial thinness: an economy rich in digital services but with limited control over the infrastructure that organizes them. Growth in the digital sector has produced a hybrid developmental path: service-intensive, globally integrated, yet structurally dependent. 

Kenya’s trajectory reflects a wider pattern across LMICs, which occupy low-value segments of digital supply chains: providing data and labour while the gains from analytics and intellectual property accrue elsewhere. This condition reproduces what UN Trade and Development calls the global data divide: a world in which some states capture the infrastructure of digital accumulation while others provide the informational raw materials. Such conditions create an informational form of dependency that parallels earlier resource extraction patterns and the “resource trap” that has long characterized commodity economies. 

Building domestic capacity to localize, analyze, and repurpose data is, therefore, a developmental imperative. It requires institutions that treat data as a productive asset and embed innovation within systems of rights and accountability. Given that these dependencies also shape the organization and conditions of labour, rethinking data governance is central to reimagining industrial policy for the platform age. 

Data, Dignity, and Decent Work 

The political economy of data is inseparable from the political economy of labour. In the digital economy, the capacity to generate and control data largely enables the capacity to organize and value work. The link between data governance and dignity at work is therefore central: the terms under which data are extracted and monetized shape the terms under which labour is performed and rewarded. 

Research on Kenya’s content-moderation workforce reveals the hidden costs of digital transition. At Sama’s Nairobi facility, employees contracted to moderate harmful content for global tech companies have reported psychological trauma, unpredictable pay, and limited recourse. A closer look at the country’s gig economy—short-term, task-based digital work coordinated through apps—exposes similar vulnerabilities: workers face algorithmic surveillance, unstable earnings, gender pay gaps, opaque rating systems, precarity, and limited avenues for collective voice or social protection. 

As evidence from other country contexts shows, such conditions are not confined to Kenya but are structural features of platform-mediated work. Algorithms not only assign tasks and evaluate performance but also shape workers’ access to income and future opportunities. This algorithmic management reproduces power asymmetries within global production networks—the same asymmetries that govern data extraction and circulation. In effect, the commodification of labour and the commodification of data proceed in tandem, reinforcing each other across the digital value chain. 

Embedding decent work—encompassing fair pay, transparency, and representation—within platform governance is both a necessity (whether a “digital transformation” can spur development) and a just transition imperative, essential for achieving better labour and societal outcomes. Translating this principle into policy requires institutions capable of coordinating across domains that are too often treated separately. This involves aligning trade, labour, and industrial policy while ensuring coherence with innovation and competition frameworks. Moreover, industrial policy frameworks must connect digital sector promotion with mechanisms that ensure worker protections and collective voice. 

Social dialogue, long a cornerstone of industrial relations, remains a crucial instrument of this governance. It enables workers, employers, and policy-makers to deliberate over algorithmic transparency, control and accountability, wage standards, and data rights—core issues that now define fairness in digital labour markets. In the platform economy, such dialogue must also extend to civil society actors engaged in debates on privacy, consumer protection, and artificial-intelligence ethics. In this way, industrial policy evolves into a process of democratic coordination over the infrastructure that organizes production, knowledge, and value in the digital age. 

Yet, national reforms alone cannot resolve the structural asymmetries of the global digital economy. The infrastructures that shape work and data often operate across borders, governed not by global standards but by platform-specific architectures that frequently evade national oversight. As a result, the capacity of any one state to regulate platform labour or secure data sovereignty is limited. Coordinated regional and multilateral action, therefore, becomes indispensable. 

Regional and Global Cooperation 

The African Continental Free Trade Area Digital Protocol represents a chance to embed these lessons in continent-wide regulatory frameworks. The Protocol aims to harmonize rules on data governance, digital trade, and platform regulation. Aligning national efforts with regional frameworks can leverage collective bargaining power and prevent a regulatory “race to the bottom.” Kenya recently ratified the East African Community (EAC) Digital Trade Protocol, though ensuring that digital integration benefits those who generate data—not only those who own platforms—remains a central governance challenge. 

Multilateralism offers the broader scaffolding for these reforms. The OECD has called for horizontal coordination across innovation, competition, and labour policy, emphasizing that digital governance must link technological progress with social outcomes. This includes measures for data localization, fair taxation of digital services, and interoperable regulatory standards. The International Labour Organization, through its ongoing discussions on a global standard for decent work in the platform economy, similarly underscores that algorithmic management and cross-border labour markets require common norms and accountability mechanisms. 

In a global digital economy characterized by entrenched asymmetries, such frameworks are indispensable. They can help ensure that the data and labour of LMICs feed into sustainable upgrading rather than extractive accumulation. UN Trade and Development further stresses the need for a global architecture that treats data as a shared resource and promotes equitable access to digital capabilities through technology transfer and open innovation. 

For LMICs, the challenge is to move beyond input-focused digital integration toward strategies that strengthen local value creation, innovation capacity, and labour protections. Coordinated action across national, regional, and global levels can help ensure that digital transformation expands—rather than constrains—domestic policy space. But turning multilateral principles into tangible outcomes ultimately depends on domestic institutions able to align industrial, labour, and data governance under a coherent, transformative vision. 

A Digital Development Pathway 

Kenya’s trajectory offers valuable lessons for the current stage of digital industrialization. First, policy cannot end with access, infrastructure, or skills development; it must extend to the governance of data, the transparency of algorithms, and the protection of rights at work to ensure domestic value capture. Second, decent work is not a by-product of transformation but one of its productive foundations: it anchors trust and stability in the labour market, creating the conditions for sustained learning, innovation, and socio-economic spillovers. Third, a credible digital development pathway must do more than attract investment. It must possess the regulatory and institutional capacity to discipline platform monopolies, nurture domestic innovation ecosystems, and cultivate public trust in the governance of technology and work. Public–private partnerships should, therefore, expand beyond capital and connectivity to include worker representation, digital-rights advocates, and local small and medium-sized enterprises—not only global firms. Industrial policy in the digital era must be infused with principles of technological and epistemic justice: equitable access to infrastructure, inclusive governance of data and knowledge, and strong socio-economic rights. 

With artificial intelligence accelerating the digital transition, LMICs face a critical choice: whether to adapt passively to technological change or to shape it as architects of a fair, inclusive, and sustainable digital future. Reimagining industrial policy in this context means embracing digital dynamism while ensuring that countries fully grasp the dividends of digitalization. 

The challenge is enormous, and so is the opportunity.

Maria Mexi is Senior Advisor on Labour and Social Policy, and Kitrhona Cerri is Executive Director of TASC Platform at the Geneva Graduate Institute.

As more jurisdictions plan or envision border carbon adjustments (BCAs), the degree of trade friction they create will depend on how well these regimes can work together.

The European Union may have pioneered a trend with its Carbon Border Adjustment Mechanism—a regime that forces importers to pay for the carbon emitted during production of their goods as if they had been produced under the European Union’s carbon pricing scheme. The United Kingdom and Norway have announced that they will soon follow suit, Australia and Chinese Taipei are actively exploring the idea, Canada’s governing Liberal Party promised such a regime in its election platform, and the United States has had bills before Congress for the last decade proposing to price carbon at the border. Others may follow as they look for ways to ensure that their carbon pricing regimes don’t simply see emissions exported to other countries where producers don’t face a carbon price.

What if that all comes true? Will exporters have to comply with different rules in each of those markets for measuring, reporting, and verifying the emissions they create in producing goods? That would quickly become a trade-restrictive, costly mess, driving up the costs of essential commodities like steel, aluminum, cement, and fertilizers. It would be particularly hard on smaller producers, and especially those from developing countries that are strapped for resources to support them in the transition to low-carbon production.

What's to be done?

In an ideal world, every BCA scheme would require measurement, reporting, and verification of carbon emissions to the same protocols, and exporters would only have to comply once to access the various BCA-covered markets. 

The long history of countries trying—mostly unsuccessfully—to reach even the less ambitious goal of mutual recognition of each other’s standards suggests that full harmonization is an unrealistic goal. There are legitimate reasons for differing compliance requirements; typically, they stem from a country’s specific economic and political realities. In the case of a BCA, each country’s producers are already subject to their unique national carbon pricing regimes, and for better or worse, the BCA that tries to match that regime at the border will mirror those unique characteristics.

A more realistic goal is interoperability. The goal would be that each jurisdiction crafts its BCA in such a way that it can work alongside other global BCA regimes to lower compliance barriers, even while maintaining differences in approach at the national level.

What would that look like in practice? The answer is different for each of the three elements of the “compliance chain”: measurement, reporting, and verification.

Measurement

One of the most critical differences between regimes for measuring greenhouse gases emitted in production is the different system boundaries. The full life cycle of production involves the extraction and processing of raw materials, production of inputs like feedstocks, fuels, and upstream goods, production of electricity, production of the goods themselves, transport, end use, and disposal. Almost every regime has a different set of boundaries for the subset of those emissions it will cover, although they mainly cover direct and, to a lesser extent, indirect electricity emissions, and emissions embedded in input goods.

Interoperability in this context could mean each regime agreeing to split the larger suite of emissions accounting into discrete modules—for example, covering feedstock production, direct emissions in production, and emissions from electricity production. The producer could furnish all of these accounts once, and each BCA regime could draw on those that were relevant to its system boundary.

There is still the matter of how the emissions are measured in each module, and here, there may be differences in protocols like how plant-level emissions are converted into product-level intensities, and how emissions are allocated among goods in installations that produce more than one covered good, or how emissions are treated for different production technologies. But here again, with coordination, the principle could stand that the basic information could be measured once, and simply used differently under different rules for allocation or production routes.

Reporting

Reporting requirements may be among the simplest parts of the compliance chain to make interoperable. Many elements of reporting could be harmonized across regimes: basic producing firm information, goods produced, and production processes, for example. An ideal web of BCAs would also coordinate on timelines for reporting. Reporting on the results of measurement would still differ, of course, to the extent that protocols for measurement differed.

Verification

BCA regimes will require that the measurement of emissions be verified by an organization that is accredited by the regime to do such certification. Interoperability in this context could involve a BCA regime recognizing accredited verifiers from other BCA regimes as able to conduct its verifications as well. There would be considerable cost savings to having a single verifier certify a firm’s data across several different BCA regimes, even if there were differences in the underlying rules applied by each.

Getting from Here to There

How could the international community achieve interoperability of BCA regimes? It would first require political will to push national regulatory regimes to coordinate with those of other countries. That coordination would be complicated by the fact that there is already a functioning BCA regime with its own protocols for measurement, reporting, and verification in place—one that was constructed without the need to reference anything other than existing domestic regulatory practice—and more will soon be added to the mix.

Fortunately, there are existing forums whose mandates would make them appropriate venues for hosting the sort of international discussions that would be required. The Organisation for Economic Co-operation and Development’s Inclusive Forum for Carbon Mitigation Approaches, for example, has interoperability as a central concern. So does the G7-spawned Climate Club, now counting 43 members. Judging solely by the number of World Trade Organization submissions on the topic of such coordination, many countries understand the need. Some, for example, have submitted proposals at the World Trade Organization in 2025 to improve transparency and consistency in emissions accounting by promoting international standards where possible. Previously, the United States and China also called for interoperability of trade-related climate measures.

The benefits of international coordination in this space are clear, and the urgency for action is acute: interoperability will be far harder to achieve once multiple regimes are fully in force. It is time to pick this low-hanging fruit, bringing the beginnings of international cooperation to a policy tool that has, until now, been controversial and divisive.

Border carbon adjustments (BCAs) are reshaping the global trade–climate interface and sparking renewed debate about the balance between environmental ambition and developmental equity. At the World Trade Organization and other international forums, developing countries have repeatedly raised concerns about the potential adverse impacts of BCAs on their economies and the consistency of such measures with the principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC). For BCAs to be truly considered a success, they must be designed not as an impediment but as a positive contribution to a fair and inclusive global transition—one that builds trust rather than fuels division.

As BCAs move from concept to implementation, they raise several interlinked issues at the intersection of climate and development policy. Reflections below draw on IISD’s ongoing analysis and extensive engagement with policy-makers and stakeholders from a wide range of World Trade Organization members—including both BCA-implementing and other jurisdictions. It reflects, among others, insights from discussions held in Bellagio, Italy, with the support of the Rockefeller Foundation, as well as from IISD’s Global Stakeholder Dialogues: a process that brought together representatives from industry, labour, academia, and civil society across multiple countries to develop the Guidance on Border Carbon Adjustment, supported by the Laudes Foundation. These collective experiences highlight practical ways to integrate development considerations into BCA design and implementation.

How can BCAs factor in development dimensions?

Applying the CBDR-RC principle to BCAs means finding ways to reflect differing national capacities without weakening climate ambition. In practice, this could involve designing BCAs that take into account the realities faced by lower-income countries and smaller exporters, while still maintaining a level playing field and avoiding carbon leakage.

Blunt approaches, like blanket exemptions for entire economies, could create problematic incentives. They might enable loopholes that encourage production to shift toward exempted regions, undermining both fairness and environmental integrity, while locking such countries into a carbon-heavy future in a world that’s moving in the opposite direction.

Both developing countries and smaller producers need treatment that enables and supports their climate action, rather than excluding them from the markets covered by BCAs.

Revenue recycling can support multiple objectives, from helping developing countries comply with BCA requirements to accelerating their decarbonization. The idea is not new. In 2022, the European Parliament proposed using EU Carbon Border Adjustment Mechanism revenues to support developing country trading partners, but the final regulation instead allocated the revenues to the EU and its member states' budget. In the United Kingdom, the draft Carbon Border Adjustment Mechanism legislation treats the mechanism as a tax with revenues flowing to the general budget. In Australia, the Carbon Leakage Review suggested that revenues from a potential BCA could be used to support industrial decarbonization, “either domestically or in cooperation with international partners.” In the United States, the proposal for a Clean Competition Act suggested a federal carbon price paired with a border carbon adjustment, with part of the revenues dedicated to assisting developing countries in their decarbonization efforts. While direct revenue earmarking might be a challenge for most jurisdictions, a discussion on how such collected resources could—and should—be used internationally is still to be had.

BCA-implementing jurisdictions can play a central role by supporting broader decarbonization in developing countries. 

Helping partners lower emissions is often seen as a constructive option, as it both reduces future BCA liabilities and advances shared climate goals. Many efforts to mitigate climate change in developing countries come with a hefty price tag and require meaningful investments that governments cannot afford on their own. Next to financial support, technology transfer and diffusion can also play an important role in making such cooperation effective.

There may also be ways to lighten the burden of BCAs, specifically for developing countries or small firms. There have been some discussions about the differentiated crediting of carbon price paid in developing countries, giving greater recognition to carbon prices already paid in countries where the same price represents a heavier economic burden, perhaps adjusted for purchasing power.

At the firm level, BCAs could, for example, give small and medium-sized enterprises more time to comply through delayed reporting or payment obligations, as well as allowing for non-punitive defaults-based reporting or excluding small shipments from BCA obligations, as long as such exemptions are not used to circumvent the basic core rules.

How can support for developing countries mitigate the impact of BCAs?

Building compliance capacity will be essential to ensure that climate ambition in developing countries is properly credited. Many developing countries will need targeted capacity building to help their firms meet BCA requirements, particularly to develop emissions monitoring, reporting, and verification systems. Establishing such systems is a daunting task for companies that have never been required to provide emissions data related to their production and supply.

The challenge is to establish a mechanism that supports exporters’ compliance with a range of different BCAs currently under construction, thereby enabling exporters to continue accessing various markets. Multilateral instruments might benefit from pooled resources and can be more neutral when providing their support. Examples like the work of the World Trade Organization’s Standards and Trade Development Facility illustrate how technical assistance can help developing countries comply with standards in a neutral manner, not tied to any single bilateral trading relationship.

Yet the bilateral support programs should not be dismissed: there is a lot of potential in the integration of essential support in the existing or future projects by the traditional donors of development assistance that might not have had time yet to build this priority into their programs.

BCAs need not be inimical to CBDR-RC, but they require thoughtful, flexible design and structured international support to ensure they advance both global climate ambition and development imperatives.

Since April 2025, the U.S. government has imposed unprecedented tariffs, sparking varied responses from its trading partners. Economist Doris Liew classifies these reactions into three categories: negotiation, retaliation, and a wait-and-see approach. Unlike other Asian counterparts, such as China, which chose to retaliate, most Association of Southeast Asian Nations (ASEAN) countries, including Malaysia, Vietnam, Thailand, and Indonesia, prefer negotiations over retaliation, primarily because they rely heavily on the U.S. market for their exports. Considering its moderate dependence on the U.S. market, Singapore has adopted a wait-and-see approach. Although their diplomatic strategies differ, they all share a concern about maintaining regional unity in response to U.S. measures. As the uncertainty on international trade policy looks likely to persist, ASEAN nations need to develop a sustainable, long-term strategy to address this challenge. 

Why Negotiations? Heavy export reliance 

Data from the Observatory of Economic Complexity indicate a high degree of export dependence on the U.S. market among some ASEAN member countries, as the U.S. is the top destination for most ASEAN exports. Most of these countries have a trade surplus with the United States, which has made them targets of its tariffs. 

The U.S. is Indonesia's second-largest export market, after China, making it vital for the country's economy. The United States accounted for 9.1% of Indonesia's total exports. The Observatory of Economic Complexity reports that Indonesian exports to the U.S. in 2023 were valued at USD 27.9 billion, while imports from the United States were valued at USD 11 billion. The United States imposed a 32% tariff on various sectors and a 25% tariff specifically on steel products. Reducing the trade imbalance has been the main focus of negotiations with the United States. 

ASEAN member states have responded not with retaliation, but with pragmatism—balancing national interests, regional unity, and long-term resilience. 

 

Like other ASEAN nations, the United States remains Malaysia's primary export destination, ranking third after China and Singapore. According to the data from the Observatory of Economic Complexity in 2023, the U.S. market valued exports at USD 41.7 billion, representing 11.9% of Malaysia's total exports. The latest data from April 2025 indicate a decline in the value of Malaysia's exports, driven by reduced exports to the United States and a significant increase in imports from it, which have risen by 120%. 

For both Thailand and Vietnam, the United States is the top export destination. The value of Vietnam's exports to the United States is USD 118 billion. This figure is significant because the United States is not even among the top 5 import sources. Although it is not as large as Vietnam's surplus, Thailand's trade surplus with the United States is also notable, with exports reaching USD 58.5 billion, while imports total USD 29.6 billion. Given this substantial surplus, it is not surprising that the United States imposed high tariffs on Thailand, reaching 36%, while Vietnam faced even higher tariffs, up to 46%. 

The United States ranks as Singapore's third-largest export market, valued at USD 32.9 billion. Unlike other ASEAN countries that have a trade surplus with the United States, Singapore imports more goods than it exports to the United States, resulting in a trade deficit of USD 10.3 billion. These conditions shape the U.S. approach to Singapore, resulting in relatively lower tariffs compared to other ASEAN nations. The United States imposes tariffs of about 10%, compared to more than 24% on some ASEAN countries, such as Malaysia, and tariffs as high as 46% on Vietnamese products.

Pragmatic Approaches: Internal and external strategies 

Given the significant dependence of ASEAN member countries on the U.S. market for exports, governments are carefully evaluating the potential consequences for local producers and industries when formulating responses to U.S. trade policies. Considering this reliance, most ASEAN member countries prioritize direct negotiations with the United States over retaliatory measures. 

To navigate these challenges, ASEAN countries have adopted several strategic approaches. First, engaging in individual talks with the United States, and second, while negotiating individually, ASEAN members are also preparing a common regional response that emphasizes the importance of multilateralism through ASEAN. Third, recognizing the vulnerability of relying on a single market, ASEAN member countries are pursuing policies to diversify their markets. Lastly, internally, ASEAN nations are implementing precautionary policies to mitigate the impact on domestic producers and employment while also undergoing domestic reforms. Through these strategic initiatives, ASEAN countries aim to safeguard their economic interests while fostering resilience against uncertainties in the global trade landscape. 

First, each ASEAN member actively engages in separate discussions with the United States to address specific trade concerns and negotiate favourable terms tailored to their national interests. Indonesia, for example, is willing to increase energy imports from the United States, including fuel, crude oil, and liquefied petroleum gas. Additionally, during Indonesia's diplomatic efforts and negotiations, it recognized that essential minerals, such as rare earth elements, cobalt, lithium, and copper, as well as other strategic resources for renewable energy, were not included in these tariffs. These exemptions allow Indonesia to manage the situation strategically. The Indonesian government can identify which commodities and products it can exempt from supply. Vietnam offers to purchase more products from the United States, ranging from Boeing airplanes to agricultural goods, in an effort to reduce the trade imbalance. Vietnam is also lowering import tariffs for liquefied natural gas and automotive products from the United States. 

As one of the ASEAN members that received the highest tariffs, Thailand's negotiation focuses on lowering tariffs to levels comparable to those of other countries, such as Malaysia and Indonesia. 

Second, while engaging in individual negotiations, ASEAN members are also working together to develop a unified regional strategy. This approach underscores the importance of multilateralism and regional cooperation, highlighting the collective voice of the ASEAN bloc in dealing with larger trading partners. The main aim is to resolve disputes through negotiations and constructive dialogue with the United States to prevent unilateral actions. As ASEAN chair in 2025, Malaysia is advancing a coordinated regional response to counter Trump's tariff policies and protect the region's economic interests. 

Third, in terms of strengthening market diversification, ASEAN countries are exploring opportunities to diversify their export destinations and fostering internal integration, acknowledging the risks inherent in relying heavily on a single market. This involves strengthening trade relationships with emerging markets and enhancing intraregional trade among ASEAN members themselves. Internally, ASEAN has intensified its internal integration efforts by upgrading its existing initiatives in trade in goods and a new initiative related to the digital economy framework. Externally, ASEAN can use the Regional Comprehensive Economic Partnership, a free trade agreement that involves ASEAN and its primary trading partners, including China, Japan, South Korea, Australia, and New Zealand. The Regional Comprehensive Economic Partnership will serve as a crucial instrument to solidify the partnership and foster economic cooperation in the region. Additionally, Indonesia’s recent membership in BRICS (along with other ASEAN member countries, such as Malaysia, Thailand, and Vietnam, as BRICS' partner countries) provides an opportunity for them to bridge relations between ASEAN and BRICS, which, in turn, will enhance their efforts to diversify into non-traditional markets. 

Fourth, the ASEAN nations are taking internal precautionary measures to reduce the potential negative impact of external shocks on domestic producers and employment. These policies may include financial support for affected sectors, training programs for workers, and incentives for businesses to adapt to changing market conditions. Singapore established a task force led directly by the prime minister to support affected industries. Similarly, Vietnam also formed a task force to mitigate the possible negative effects on the domestic economy, including protecting strategic sectors. For Indonesia, this also involves domestic reforms to overcome non-tariff barriers, which were also discussed during negotiations with the United States. The Thai government introduced a USD 15 billion stimulus package to support key parts of the economy, including helping small and medium-sized enterprises survive short-term shocks and achieve long-term growth. 

Navigating Uncertainty With Unity and Adaptability 

The imposition of U.S. tariffs posed a significant challenge for ASEAN member states, requiring them to navigate a complex geopolitical and economic landscape. Their reactions have been pragmatic and varied, focusing on diplomatic efforts rather than retaliation, pushing for economic diversification, strengthening regional integration, and both providing support for domestic industries and accelerating reform of domestic non-tariff measures. 

The tariffs, while disruptive, have accelerated ASEAN's shift toward regional integration and market diversification.

 

Although the tariffs initially caused disruptions and exposed vulnerabilities, they also unintentionally accelerated ASEAN's move toward closer intraregional connections and economic partnerships. In the long term, these strategies point to a more resilient and interconnected ASEAN that relies lesst on a single trade partner and plays a bigger role in future global trade trends. This experience underscores the importance of collective action, strategic foresight, and adaptability in navigating volatile global economic conditions. As negotiations are still ongoing and no one can foresee the results of current geopolitical dynamics, ASEAN member states should be prepared for various possible outcomes. 

Poppy S. Winanti is a Professor of International Relations in the Faculty of Social and Political Sciences at Universitas Gadjah Mada, Indonesia.

Neutrality Between the United States and China May Come Under Pressure 

While the immediate effects of sweeping U.S. tariffs will fall hardest on major exporters such as China and the European Union (EU), the Middle East and North Africa (MENA) region will not be untouched. The impacts may be delayed and mostly indirect, but they will test the region's resilience in the year ahead. 

At first glance, most MENA economies appear insulated. The United States is not a major trading partner for much of the region. On average, only around 5% of MENA exports go to the United States, and much of this consists of oil and gas, which are typically exempt from tariff measures. In the Gulf, direct exposure is even lower. The United Arab Emirates and Saudi Arabia, for instance, send just 2% to 4% of their exports to the United States, most of it in hydrocarbons that avoid tariff coverage. Based on these figures, the region seems unlikely to face immediate disruption. 

But that view is deceptive. Trade policies of this scale rarely stay contained. Global protectionism disrupts supply chains, shifts investment flows, and generates market uncertainty that ripples well beyond the countries directly involved. MENA economies, especially those that rely heavily on hydrocarbons and global capital, are acutely sensitive to these second-order effects. 

Energy Prices and Trade Diversion 

Oil markets are especially vulnerable. A sustained trade dispute between major economies could weigh on global growth expectations, pushing energy prices lower. 

This risk is no longer theoretical: the International Monetary Fund's May update downgraded regional growth to 2.6%, in part due to these spillovers. For Gulf states, this creates immediate fiscal strain. Saudi Arabia, which is at the centre of the region's economic transformation efforts, relies heavily on oil export revenue to fund capital projects and maintain macroeconomic stability. A drop in prices complicates budget execution, slows project delivery, and increases pressure on public finances. The impact on smaller, more vulnerable economies such as Bahrain or Oman would be even more pronounced. 

Compounding these challenges is the growing instability in the Gulf. The June escalation between Israel and Iran has driven Brent crude prices above USD 80 per barrel. Nearly a fifth of global oil passes through the Strait of Hormuz, and any disruption would send shockwaves through global supply chains. Oil exporters may benefit from higher revenues in the short term, but heightened volatility complicates fiscal planning and project financing. Oil importers, on the other hand, face greater inflation, trade imbalances, and rising subsidy burdens. 

Trade diversion is also a risk. When large markets such as the United States raise tariffs, exporters look for alternative markets for certain goods. Regions with open trade regimes and few restrictions, like the Gulf Cooperation Council, can be obvious targets. According to Simon Evenett, this won't happen across the board. Products including cars and electronics, for example, are unlikely to see significant diversions into Gulf markets. Instead, the main risk is in sectors where Chinese producers have excess supply and tight margins, such as steel and aluminum. For Gulf markets, this means local industries in these areas could still face price pressure and tougher competition from inexpensive imports. 

This practice, known as dumping, is not new. The region experienced it in 2017 when Chinese steel, blocked from the United States and the EU, found its way into Gulf markets and undercut local producers. There is a risk of history repeating itself, this time across a broader range of sectors. Moody's has already flagged that MENA's exposure to U.S. tariffs remains mostly indirect, tied to broader market volatility and global trade disruptions. 

Some Countries Will Be Hit Harder Than Others 

While exposure across MENA is limited, certain countries in the region are more exposed. Jordan, for example, sends more than a quarter of its exports to the United States, with apparel and garments making up the majority. New tariffs could undercut the competitive edge Jordanian producers hold, reducing orders and putting employment in export-dependent sectors at risk. 

On the other end of the spectrum, Türkiye may find some upside. U.S. tariffs on EU and Chinese goods could make Turkish products, such as textiles, more competitive in the American market. Textiles and machinery together already account for more than 15% of Türkiye's sales to U.S. buyers, so any advantage counts. Since Turkish textiles face only a 10% tariff while Chinese and EU producers deal with steeper rates, Turkish manufacturers could gain an edge. Combined with the potential to deepen EU ties, Türkiye might manage to position itself more favourably, at least in the near term. 

Morocco, as a net importer, could benefit from lower global prices for key imports such as machinery and manufactured goods if trade tensions lead to excess supply from China and Europe being redirected at discounted rates. However, this could be counter-balanced if these same trade tensions depress global demand for Moroccan exports including phosphates and fertilizers. 

At the same time, domestic inflationary pressures are mounting. The U.S. Federal Reserve held interest rates steady in June but flagged persistent inflation driven in part by protectionist measures. For MENA economies, many of which peg their currencies to the U.S. dollar, this means tighter monetary policy space and higher import costs, adding pressure on consumers and budgets alike. 

Opportunities From the Disruption 

Yet this period of disruption could also bring opportunity. The Gulf's geography has long positioned it as a critical global trade hub, dating back to the ancient Silk Road, where goods, culture, and capital flowed between Asia, Africa, and Europe. That legacy continues to shape its positioning today. As trade routes begin to shift again, the region's strategic location is once more a strength. 

President Donald Trump's visit to Saudi Arabia, Qatar, and the UAE in May 2025 was a reminder of the region's growing strategic importance in the context of U.S. economic diplomacy. While no major trade agreements were signed, the visit included investment pledges and talk of deepening bilateral partnerships. For Gulf states, this reinforces a trend toward transactional, bilateral deals, potentially outside multilateral frameworks, and raises questions about long-term alignment as U.S.-China competition intensifies. There is growing potential to deepen interregional trade, enhance links with emerging markets in sub-Saharan Africa and South Asia, and expand trade relations with India. These shifts not only open new markets for Gulf exporters but also offer avenues for greater resilience. 

Additionally, trade is no longer just about goods. The region is increasingly investing in digital infrastructure, logistics, and alternative payment systems that can reduce reliance on traditional financial channels. These developments could help mitigate external shocks and allow for more autonomous economic positioning. 

MENA's Inflection Point 

Taken together, these dynamics suggest a region that will not feel a strong initial shock from U.S. tariffs. MENA's exposure lies not in direct trade volumes, but in the fragility of the global environment that sustains its economies. The Gulf Cooperation Council sits in a shaky position. It has so far maintained a careful balance, growing ties with both Washington and Beijing while steering clear of hard alignment. But as the global trading system becomes more fractured and regional tensions escalate, that non-alignment may come under increasing pressure. 

MENA's exposure lies not in direct trade volumes, but in the fragility of the global environment that sustains its economies.

 

Whether that balance can hold is now an open question. As trade becomes weaponized and security concerns increasingly shape economic policy, MENA's longstanding strategy of non-alignment will be harder to maintain. However, the region is not merely exposed—it is strategically positioned. If political leaders can respond with agility, deepen regional ties, and invest in more autonomous economic tools, MENA could emerge from this period not just resilient, but more globally relevant than ever. 

This article is an updated version of a piece originally published by OMFIF and is republished by the International Institute for Sustainable Development with the organization's permission. 

Yara Aziz is a Senior Economist at OMFIF's Economic and Monetary Policy Institute.

Overview of the Announced U.S. Tariff Regime 

On April 2, 2025, Trump issued Executive Order 14257, which introduced sweeping tariffs on products imported into the United States from 190 countries and territories. The Trump administration announced additional duties in two tranches. First, starting on April 5, 2025, a universal ad valorem tariff of 10% would be applied on imports from all 190 named countries. Second, starting on April 9, 2025, the higher country-specific ad valorem tariffs, ranging from 11% to 50%, would apply to 57 countries listed in Annex I of the executive order (see Figure 1). The tariffs were calculated by dividing the U.S. trade deficit with a particular country by the total goods imported from that country in 2024. The resulting number was subsequently divided by two to reach the final tariff rate. 

Nevertheless, the executive order exempts more than 1,000 products, including petroleum, critical minerals, metals, rare earths, and organic and inorganic chemicals. It also excludes the U.S. content of any product made in any country, provided that the U.S. content accounts for at least 20% of the declared value of the product. Also excluded are products like steel and aluminum, passenger vehicles, light trucks, and vehicle parts. While automobiles and auto parts are already subject to additional tariffs of 25% (announced on March 25, 2025), on June 3, 2025, the White House announced that the additional tariffs on steel and aluminum would increase to 50%. 

Following a week of stock market crashes, on April 9, the day the country-specific rates were scheduled to enter into force, Trump issued another executive order. This one suspended all the higher country-specific tariffs on products from all countries except China. The additional higher duties on goods from all the other countries were suspended until July 8, 2025. However, the 10% rate continues to apply to all imports from the originally named countries and territories. 

What Are the New Tariff Rates for African Countries? 

Of the 57 countries facing the higher tariff rates, 20 are African. The higher tariffs that will apply on African products range from 11% levied on imports from Cameroon and the Democratic Republic of the Congo, to 50% on goods from Lesotho (see Figure 2). The latter—a small, southern African country—faces the highest tariff increase of all the countries on the list (see Figure 1). Besides Lesotho, African countries that face the highest additional tariffs are Madagascar (47%), Mauritius (40%), Botswana (37%), Angola (32%), Libya (31%), and Algeria and South Africa (both 30%). Twenty-nine African countries are subject to only the 10% baseline tariff surge; these include Egypt, Ethiopia, and Kenya. At the subregional level, East Africa was spared the higher country-specific tariffs, while Southern Africa faces the highest tariff rates on the continent. Only three African countries, Burkina Faso, Seychelles, and Somalia, do not appear on the lists and do not face any tariff increases, presumably because each maintains a trade deficit vis-a-vis the United States. 

The tariff announcement was issued during a time of expanding U.S.–Africa trade. According to the U.S. Trade Representative, in 2024, U.S. total goods trade with Africa was approximately USD 71.6 billion (see Figure 3). U.S. goods exports to Africa were USD 32.1 billion, up 11.9% (USD 3.4 billion) from 2023. U.S. goods imports from Africa in 2024 totalled USD 39.5 billion, up 1.9% (USD 0.8 billion) from 2023. This means the United States had a goods trade deficit with Africa of USD 7.4 billion. While the recent executive order was premised on rising trade deficits, the 2024 U.S. trade deficit with Africa represented a 26.4% decrease (USD 2.6 billion) from 2023. Nevertheless, the U.S.–Africa trade deficit is unsurprising as African countries largely export commodities like oil, precious stones and metals, minerals, rubber, and other agricultural products like cocoa and nuts, some of which are not produced in the United States. 

The over 1,000 exemptions under Annex II of the executive order include products that are critical for the U.S. economy. Coincidentally, these commodities, especially petroleum, gold, platinum, and copper, comprise Africa's main export basket. This means that mineral-exporting African countries, such as Angola, the Democratic Republic of Congo, Nigeria, South Africa, and Zambia, could obtain significant relief from the universal and country-specific tariffs because of these product carve-outs. 

These tariffs, once in full effect, could have variable impacts on African countries. Our estimates indicate that countries such as Lesotho, Madagascar, and Mauritius will potentially be the most affected because of their relatively higher exports to the United States of products that are not exempt from the tariffs (see Table 1). Lesotho, in particular, stands to lose its textiles and clothing industry, which was developed to take advantage of the Africa Growth and Opportunity Act’s (AGOA's) textile preferences. The clothing factories employ close to 36,000 locals, the vast majority of whom are women. South Africa's motor vehicle exports are also vulnerable due to the 25% specific tariff on passenger vehicles. 

On the other hand, the relatively lower universal tariff (10%) imposed on textile-producing countries like Egypt and Kenya could offer an opportunity for those countries to benefit from better U.S. market access compared to countries in Asia, such as Bangladesh, India, and Vietnam, that face much higher tariffs. The United States is Egypt's top export destination for clothing and apparel. In 2022, Egypt's exports to the United States totalled USD 1.5 billion, accounting for over 30% of Egypt's exports of these products. Likewise, for Kenya, in 2022, the U.S. market accounted for almost 70% of its textile exports, which are exported to the United States under AGOA's clothing and textiles preferences. 

How Have African Governments Responded So Far?

In the immediate aftermath of the tariff announcements, various governments around the world sought to engage the Trump administration on the new tariffs. According to the White House, over 75 countries reached out to negotiate in less than a week after the April 2 announcement. African countries had varied responses, as indicated in Table 2. Some countries, like Zimbabwe, have offered to unilaterally eliminate tariffs on U.S. imports, while others, like Uganda, have resolved to build more resilient and self-sustaining domestic economies. Moreover, countries like Lesotho, Madagascar, and South Africa announced that they were organizing delegations to hopefully strike a bilateral deal with the United States. In fact, on May 21, 2025, South African President Cyril Ramaphosa met with Trump at the White House to address trade issues, among other topics. 

Moreover, on April 10, 2025, African WTO members, Cabo Verde, Cameroon, Gambia, Liberia, Nigeria, and Sierra Leone, within a group of 39 Friends of the System, co-signed a communiqué in which they undertook to "work closely together to shape the future of the global trading system." These WTO members pledged "to undertake bold, collective action that reflects the changing dynamics of the global economy and responds to the challenges ahead."

Implications for the Africa Growth and Opportunity Act 

Looming large in the background is the fate of AGOA, which is scheduled to lapse on September 30, 2025. AGOA is a nonreciprocal trade preference program that was enacted in 2000 by the Bill Clinton administration. It seeks to boost sub-Saharan Africa's economic growth and development by providing eligible countries with duty-free access to the U.S. market for thousands of products. While the program has been reauthorized at least once over the last two decades, it fell through the cracks during the Biden administration. Many attempts have been made to ensure its reauthorization and modernization. U.S. Senators Chris Coons and James Risch have also proposed expanding AGOA beneficiaries to include North African countries. 

While eligible African countries largely underutilize AGOA, this preference scheme has been the basis of meaningful discussions and U.S. investment in African economic sectors for the past 25 years. However, unlike Mexico and Canada under the U.S.–Mexico–Canada Agreement, African beneficiaries of this program are not shielded from the additional tariffs imposed and proposed by the United States. Ironically, taking advantage of AGOA preferences is exactly why countries like Lesotho face such high tariff rates. Nevertheless, AGOA's lapse could leave many African countries with precarious U.S. market access opportunities, especially textile-exporting African countries like Lesotho and Madagascar. 

However, there are some claw-back opportunities for some African countries. Trump has issued other executive orders stating his interest in negotiating bilateral and/or sectoral trade agreements that exempt specific minerals and resources from duties. Moreover, in his America First Trade Policy memorandum, Trump directed the U.S. trade representative to "identify countries with which the U.S. can negotiate agreements on a bilateral or sector-specific basis to obtain export market access for American workers." Many experts have warned against the deterioration of AGOA and proposed that the current U.S. administration could use the scheme strategically to source critical minerals from Africa. This would help ensure U.S. energy security and supply chain diversification by presenting alternative source countries to mitigate its reliance on China. The AGOA parties could consider an arrangement that focuses the trade preference scheme on specific products of interest to the United States, and the United States could commit investments into those sectors in Africa. 

Conclusion: What's next for U.S.–Africa trade relations? 

African countries, under the leadership of the African Union, should negotiate as a region to bolster their individual market sizes. A coordinated effort will not only shield individual economies but could also ensure that any deal reached with the United States does not undermine the region's trade and economic integration efforts under the African Continental Free Trade Area. Moreover, African countries could use this uncertainty to establish those highly touted regional value chains to benefit from tariff-free or lower-tariff African jurisdictions. Provided that preferences under AGOA can be claimed, this could be a way for higher-tariff jurisdictions to leverage AGOA's regional cumulation conditions under the agreement's general rules of origin to maintain some competitiveness in the U.S. market. 

The 90-day suspension of the country-specific tariffs has provided Africa some breathing room, but time has run out. Africa should advance its trade relations with the United States beyond July 8, 2025, and even beyond September 30, 2025. 

This article is an updated version of a piece originally published by Carnegie and is republished by the International Institute for Sustainable Development with the organization's permission. 

Kholofelo Kugler is the Head of Trade Law at Besso, and Tani Washington is a junior fellow at the Carnegie Endowment for International Peace.